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Homestead Tax Exemptions

The homestead tax exemption applies to property taxes. It’s generally a dollar amount or percentage of the property value that is excluded when calculating property taxes. The amount or percentage depends on the state, as does who is eligible for the exemption. In some states, every homeowner gets the tax exemption, while in other states, eligibility depends on income level, property value, age or if you’re disabled or a veteran. One thing that is true in every state that has a homestead tax exemption, however, is that the home has to be a primary residence. Most states offer the homestead tax exemption.

Taxes are one of many factors to keep in mind when you become a homeowner. Consider working with a financial advisor who can help you manage the financial aspects of homeownership.

How Property Taxes Work

If you’re not familiar with property taxes, here’s a quick refresher. The value of your home will be assessed, and then a property tax rate will be applied to that assessed value. You can appeal the value if you think it’s too high, but in general property tax bills are what they are.

Property tax rates fluctuate according to the decisions and needs of the tax authorities in your area. If the city decides it needs more funds, property tax rates may increase. Sometimes, residents can vote on these rate changes and in other cases the decision is made with public input but doesn’t require public consent.

How Homestead Tax Exemptions Work

Homestead Tax Exemptions

Homestead tax exemptions shelter a certain dollar amount or percentage of home value from property taxes. They’re called “homestead” exemptions because they apply to primary residences, not rental properties or investment properties. You must live in the home to qualify for the tax break.

Some states exempt a certain percentage of a home’s value from property taxes, while other states exempt a set dollar amount. If your state uses a percentage method, the exemption will be more valuable to homeowners with more valuable homes. If your state uses a flat dollar amount for its exemption, the exemption will be more valuable to homeowners with less expensive homes.

Ready for an example? To keep things simple, let’s say the assessed value of your home is $200,000 and your property tax rate is 1%. Your property tax bill would equal $2,000. But if you were eligible for a homestead tax exemption of $50,000, the taxable value of your home would drop to $150,000, meaning your tax bill would drop to $1,500.

Who Is Eligible for the Homestead Tax Exemption?

In some states, you’ll get the homestead exemption (or a bigger one) if your income is low, you’re a senior, you have a disability or you are a veteran. In most cases, these exemptions can’t be combined if you fall into more than one category. Some states also set an upper limit on the value of homes that can qualify for exemptions.

State governments can’t directly affect property tax rates because rates are set at the local level. So state-wide homestead tax exemptions are a way for state governments to lower property tax bills indirectly. They do this to encourage homeownership, keep residents happy and give a property tax discount to people in need of a tax break.

Which States Have the Homestead Tax Exemption?

It has been reported that 46 states have homestead exemptions, though they may not be homestead tax exemptions. States that have general homestead laws (e.g., to protect surviving spouses from creditors) may be included in the count. Every state except Delaware offers some kind of property tax relief for veterans or disabled veterans.

Bottom Line

Homestead Tax Exemptions

If you qualify, a homestead tax exemption can be a much-needed boon to your budget. Be sure to comply with state and local rules for claiming the tax exemption. If an application is required, submit your application for a homestead exemption in a timely manner. In some counties, scammers have fraudulently requested payment for filing these applications, so be aware. For applications and issues related to homestead tax exemptions, go directly to your county or local tax assessor.

Tips for New Homebuyers

  • If you’re looking to make the switch from renter to owner, you may want to know about loan programs for first-time buyers. Generally, they are meant to help people with less- than-excellent credit scores or who can’t make 20% down payments.
  • Owning your home is a great financial step. But do you have an overall plan for your finances? If you don’t, a professional can help. To find one, use our free matching tool. It will connect you with up to three financial advisors in your area.

Photo credit: ©iStock.com/Johnny Greig, ©iStock.com/Portra, ©iStock.com/ArtMarie

Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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